Magazine

American's Latest Test Flight

December 01, 2002

A decade after rocking the airline industry with an effort to simplify fares, American Airlines Inc. (AMR) is at it again. On Nov. 14, it quietly kicked off a test of a new, streamlined fare structure: It has slashed walk-up coach prices by 40%, while at the same time hiking some leisure fares on those routes.

But unlike American's so-called Value Pricing effort in 1992, this test isn't likely to lead to crippling fare wars. This time, the nation's largest airline is moving cautiously in a mere 23 domestic markets, many of which American dominates, such as Dallas to Los Angeles. That, airline experts say, should limit retaliation for now.

Still, the experiment, closely watched by competitors, could prove to be a watershed in the industry's efforts to return to financial health. With airline losses likely to top $7 billion this year, all the big carriers are scrambling for ways to slash costs and boost revenues. Delta Air Lines on Nov. 13 unveiled a new low-cost "airline-within-an-airline" to take discount carriers head on. But few have been brave enough to make drastic fare moves for fear of sparking an industry bloodbath.

What's behind the fare changes? Demand from business passengers who have been clamoring for years for a simpler, more fair system. So American is slashing the priciest coach fares while at the same time raising prices on some restricted tickets. It's also collapsing more than a dozen fares per market to just five or six. It hopes the change will boost revenues by stimulating more business travel in a severely depressed market. But it must also persuade passengers who buy the cheapest restricted fares to pay for higher-priced, more flexible tickets.

Will the discounts be enough to tempt more business travelers? Many already pay far less than the posted business fares, thanks to corporate discounts, lower advance-purchase prices, and discount carriers. American Express Co. calculates that the typical one-way business fare was $572 in the second quarter, while the average fare actually paid by business travelers was only $273. But those cheaper fares sometimes come with circuitous routings or restrictions.

American's move also may not win much favor from leisure travelers, who already enjoy rock-bottom fares. And it could be easily undercut by rivals. The 30-day advance-purchase prices in American's new fare scheme are typically 10% to 15% higher than what customers can already snag in sporadic fare sales, says analyst Jamie N. Baker of J.P. Morgan Securities Inc.

All of which means American's gambit is no slam-dunk. Northwest Airlines Corp. says it considered a similar move a year ago but couldn't make the numbers work. Still, there are promising signs a new pricing approach could help. Baker says Delta Air Lines Inc. (DAL), which has experimented with walk-up fare cuts of up to 21% in 470 domestic markets since late August, has enjoyed an estimated 10% to 15% revenue gain on those routes. Delta refuses to comment.

America West Airlines Inc. (AWA) led the pack with its own fare-simplification efforts last March, including cutting walk-up business fares on its entire system by 60%. The result: more business fares sold and higher revenues. Its revenue per passenger mile flown is now about 85% of the industry average, vs. 75% to 80% before the change. But smaller America West could afford the risk since it sold few full-fare tickets to begin with. It also didn't have to worry about attracting the same kind of retaliation that giant American could.

Whatever the result for American, business customers and travel agents alike say the fare overhaul is a step in the right direction. They have long called for a vast reduction in the gap between business and leisure fares. American Express (AXP) says business tickets on average are now six times the lowest discount price. That compares to 2.5 times six years ago. "The airlines have had their heads in the sand saying business travel is off because of the economy, period," says Kevin P. Mitchell, chairman of the Business Travel Coalition, which represents corporate travel buyers. Now, that's finally changing. Of course, in these tough times, the big airlines have little left to lose. By Wendy Zellner in Dallas, with Michael Arndt in Chicago